{"id":15062,"date":"2025-11-07T11:01:34","date_gmt":"2025-11-07T16:01:34","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/?p=15062"},"modified":"2025-11-07T11:01:35","modified_gmt":"2025-11-07T16:01:35","slug":"the-us-dollar-in-transition-cyclical-volatility-meets-structural-shifts","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/the-us-dollar-in-transition-cyclical-volatility-meets-structural-shifts","title":{"rendered":"The U.S. dollar in transition: Cyclical volatility meets structural shifts"},"content":{"rendered":"\n

By Joseph Wu, CFA<\/strong><\/p>\n\n\n\n\n

A volatile year for the greenback<\/h2>\n

\n After a sharp slide in H1 2025, the greenback has settled into a narrower\n trading range since July as foreign demand for U.S. assets was more\n resilient than expected. Earlier concerns about widespread capital\n outflows following the Trump administration\u2019s tariff salvo in April have,\n so far, not materialized.\n <\/p>\n

\n However, the magnitude of the dollar\u2019s earlier weakness warrants some\n context. The roughly 10 percent drop in the U.S. Dollar Index (DXY) through\n midyear 2025 \u2013 an outsized move for a major currency \u2013 essentially unwound the\n strong late-2024 rally, when optimism surrounding U.S. growth prospects\n ahead of and following the November elections briefly lifted the\n greenback.\n <\/p>\n \n

An election-related rally followed by a bigger selloff<\/h3>\n

U.S. Dollar Index (DXY)<\/h4>\n
\n
\n \"U.S.\n

\n Source – RBC Wealth Management, Bloomberg; daily data through 10\/24\/25\n <\/p>\n

\n The line chart shows the U.S. Dollar Index since 2024. The index rose\n by 7.6% in Q4 2024 followed by a 10.7% decline in the first half of\n 2025.\n <\/p>\n <\/div>\n <\/div>\n \n

Zoom out for cycles<\/h2>\n

\n Viewed through a longer lens, the U.S. dollar tends to move in prolonged\n regimes lasting around seven to 10 years. Historically, strong dollar\n cycles have generated average gains of roughly 65 percent, while weak dollar\n phases have seen average declines of around 40 percent. Whether the latest\n long-running bull cycle \u2013 which began in early 2008 \u2013 peaked in Sept. 2022\n remains to be seen. Since that point, the DXY has fallen about 13 percent,\n suggesting to us that the currency may be transitioning into a new phase.\n <\/p>\n \n

A new phase?<\/h3>\n

U.S. Dollar Index (DXY)<\/h4>\n
\n
\n \"U.S.\n

\n Shaded regions indicate U.S. dollar bear cycles.\n <\/p>\n

\n Source – RBC Wealth Management, Bloomberg; monthly data through\n 9\/30\/25\n <\/p>\n

\n The line chart shows the U.S. Dollar Index since 1970, highlighting\n rising (bullish) and falling (bearish) phases (listed in the table\n below).\n <\/p>\n <\/div>\n <\/div>\n

\n In the near term, cyclical forces \u2013 relative growth momentum, interest rate\n differentials (the difference between U.S. rates and those of other large,\n advanced economies), and the ebb and flow of U.S. policy uncertainty \u2013 will\n likely continue to shape the dollar\u2019s direction over the next six to 12\n months. Political unpredictability, such as abrupt trade-policy changes,\n can erode confidence in the greenback, as seen earlier this year.\n <\/p>\n

\n Over the long run, however, starting valuations tend to exert greater\n influence. Even after this year\u2019s depreciation, RBC Global Asset\n Management estimates that the U.S. dollar remains notably overvalued\n relative to major peers. Although valuations have limited sway on\n short-term market moves, they tend to anchor long-term outcomes,\n suggesting to us that the dollar may face a more challenging multi-year\n outlook.\n <\/p>\n \n

Currency purchasing power parity valuation<\/h3>\n

Oct. 2025<\/h4>\n
\n
\n \"Currency\n

\n USD valuation calculated relative to other countries using weights\n from the U.S. Trade-Weighted Advanced Foreign Economies (AFE) Dollar\n Index.\n <\/p>\n

Source – RBC Global Asset Management<\/p>\n

\n The column chart shows estimated valuation levels for select major\n currencies in terms of purchasing power parity. The U.S. dollar is\n valued at +15%, the New Zealand dollar at -9%, the euro and Australian\n dollar at -12%, the Canadian dollar at -19%, the Norwegian krone and\n Swedish krona at -33%, and the Japanese yen at -50%.\n <\/p>\n <\/div>\n <\/div>\n \n

Implications for global equities<\/h2>\n

\n A durable turn in the U.S. dollar\u2019s structural trend would likely be a\n more conducive environment for equity markets outside the United States.\n The table below illustrates historical dollar bull and bear cycles since\n Dec. 31, 1969, underscoring how the dollar\u2019s direction can be a meaningful\n driver of equity market leadership patterns.\n <\/p>\n

\n Periods of broad dollar strength have typically aligned with U.S. equity\n outperformance. Conversely, during extended stretches of dollar\n weakness \u2013 such as those observed between 1970 and 1978, 1985 and 1992, plus\n 2002 and 2008 \u2013 equity markets outside the U.S. have tended to perform well\n or take the lead.\n <\/p>\n \n

U.S. dollar cycles<\/h3>\n

Since Dec. 31, 1969<\/h4>\n
\n \n \n \n \n Cycle\n <\/th>\n \n Duration
\n (years)\n <\/th>\n \n U.S. Dollar
\n Index (DXY)\n <\/th>\n \n S&P 500\n <\/th>\n \n MSCI World
ex USA Index\n <\/th>\n <\/tr>\n \n Start<\/th>\n End<\/th>\n Cum.<\/th>\n Ann.<\/th>\n Cum.<\/th>\n Ann.<\/th>\n Cum.<\/th>\n Ann.<\/th>\n <\/tr>\n <\/thead>\n \n \n Dec 1969<\/td>\n Oct 1978<\/td>\n 8.8<\/td>\n -31.8%<\/td>\n -4.2%<\/td>\n 43.3%<\/td>\n 4.2%<\/td>\n 85.3%<\/td>\n 7.2%<\/td>\n <\/tr>\n \n Oct 1978<\/td>\n Feb 1985<\/td>\n 6.3<\/td>\n 93.1%<\/td>\n 10.9%<\/td>\n 168.8%<\/td>\n 16.9%<\/td>\n 34.7%<\/td>\n 4.8%<\/td>\n <\/tr>\n \n Feb 1985<\/td>\n Aug 1992<\/td>\n 7.5<\/td>\n -50.8%<\/td>\n -9.0%<\/td>\n 196.1%<\/td>\n 15.6%<\/td>\n 207.2%<\/td>\n 16.1%<\/td>\n <\/tr>\n \n Aug 1992<\/td>\n Jan 2002<\/td>\n 9.4<\/td>\n 52.4%<\/td>\n 4.6%<\/td>\n 228.1%<\/td>\n 13.4%<\/td>\n 58.8%<\/td>\n 5.0%<\/td>\n <\/tr>\n \n Jan 2002<\/td>\n Mar 2008<\/td>\n 6.2<\/td>\n -40.3%<\/td>\n -8.0%<\/td>\n 31.0%<\/td>\n 4.5%<\/td>\n 126.7%<\/td>\n 14.2%<\/td>\n <\/tr>\n \n Mar 2008<\/td>\n Sep 2022<\/td>\n 14.5<\/td>\n 56.1%<\/td>\n 3.1%<\/td>\n 263.5%<\/td>\n 9.3%<\/td>\n 35.2%<\/td>\n 2.1%<\/td>\n <\/tr>\n \n Sep 2022<\/td>\n Sep 2025<\/td>\n ?<\/td>\n -12.8%<\/td>\n -4.5%<\/td>\n 94.9%<\/td>\n 24.9%<\/td>\n 83.1%<\/td>\n 22.3%<\/td>\n <\/tr>\n \n \n Bull cycle (average)\n <\/td>\n \n 10.1\n <\/td>\n \n 67.2%\n <\/td>\n \n 6.2%\n <\/td>\n \n 220.2%\n <\/td>\n \n 13.2%\n <\/td>\n \n 42.9%\n <\/td>\n \n 4.0%\n <\/td>\n <\/tr>\n \n \n Bear cycle (average)\n <\/td>\n \n 7.5\n <\/td>\n \n -41.0%\n <\/td>\n \n -7.1%\n <\/td>\n \n 90.1%\n <\/td>\n \n 8.1%\n <\/td>\n \n 139.7%\n <\/td>\n \n 12.5%\n <\/td>\n <\/tr>\n <\/tbody>\n <\/table>\n <\/div>\n

\n Index performance: Cum. = cumulative; Ann. = annualized. Equity\n performance reflects total returns.\n <\/p>\n

\n Source – RBC Wealth Management, Bloomberg; data through 9\/30\/25\n <\/p>\n\n \n

Currency diversification<\/h2>\n

\n Over the past decade, persistent dollar strength has enhanced U.S. equity\n returns in foreign-currency terms while dampening global ex-U.S. equity\n performance when measured in dollars. If the U.S. dollar is transitioning\n to a secular weakening phase, those dynamics could reverse \u2013 turning a\n longstanding headwind into a tailwind for globally diversified portfolios.\n <\/p>\n

\n Recent market behaviour underscores this point: broad-based dollar\n weakness in H1 2025 lifted the MSCI World ex USA Index to a 19.5 percent total\n return, compared to the S&P 500\u2019s 6.2 percent advance over the same period.\n <\/p>\n

\n Even within a structural downtrend, however, the U.S. dollar\u2019s path is\n unlikely to be linear. Periodic shifts in relative growth and interest\n rate differentials between the U.S. and other economies can still generate\n countertrend rallies. Meanwhile, the dollar\u2019s unique reserve-currency\n status should continue to underpin steady demand that could at times\n support its value beyond what fundamentals imply.\n <\/p>\n

\n Nevertheless, valuations remain an important guidepost for assessing\n long-term expectations. In our view, the combination of the U.S. dollar\n starting from a position of broad overvaluation and the elevated weight of\n U.S. assets in many portfolios reinforces the strategic merit for\n maintaining meaningful allocations to global ex-U.S. equities.\n <\/p>\n

\n Foreign exchange regime shifts can introduce uncertainty \u2013 but also\n opportunity. For long-term investors, a trend transition toward dollar\n weakness could reopen a window for global equity diversification to\n reassert its value as a source of both return potential and currency\n diversification.\n <\/p>\n","protected":false},"excerpt":{"rendered":"

The greenback\u2019s volatile year underscores the interplay between cyclical drivers and longer-term valuation challenges \u2013 factors that could have implications for global equity leadership.<\/p>\n","protected":false},"author":22,"featured_media":15063,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2025-11-06T09:11:15","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[572,295,49],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-15062","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-currency","tag-global-equities","tag-u-s-dollar","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The greenback\u2019s volatile year underscores the interplay between cyclical drivers and longer-term valuation challenges 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